Vietnam's financial hopes still a reach

Analysis: War image, bureaucracy hold back investment

By

AllenWan

HO CHI MINH CITY, Vietnam (CBS.MW) -- Tranh Nguyen sits on his motorbike outside the Reunification Palace, the former home of the South Vietnamese government, now an aging edifice that draws stares as much for its groovy 1960s architecture as its past grandeur.

"I'll take you to Cholon for 15,000 dong [$1]," shouts the driver. Normally, Nguyen wouldn't accept less than half of that for the 20-minute ride to the city's Chinatown. But these aren't normal times.

"Tourism is just starting to return after SARS," says Nguyen, who, like many of the country's fledgling entrepreneurs, needs to supplement his regular job as an English teacher in order to make ends meet.

On the thrill ride to Cholon, Nguyen is grinning. It's all a bit baffling given what he and his country have had to endure over the years. The My Lai resident lost two of his relatives during the Vietnam War. He was drafted to fight the Khmer Rouge rebels in neighboring Cambodia and barely escaped with his life. "Life is pretty good now," says Nguyen. "The government is too conservative and should open up more. Still, we have peace and prosperity now."

The fact is that despite stop-and-go government policies, growing income disparities, high unemployment and other social and economic problems, Nguyen and many other young Vietnamese in this bustling southern capital are generally happy with their lot. The country is at peace, and former enemies such as China have turned into major trading partners.

Besides its large and well-educated population that cares more about making money than waving the red banner, Vietnam is like China in other ways, too. Its economy is booming, growing at better than a 7 percent clip on the back of strong agricultural exports.

But the similarities end when it comes to attracting capital. While China's stock markets have quietly become Asia's second biggest after Japan, Vietnam is still struggling to get any kind of investment that's geared specifically toward the country's high-growth dynamics. The government's own wishy-washy view of capitalism also makes it hard for people like Dominic Scriven, director and co-founder of Ho Chi Minh City-based Dragon Capital, to drum up interest in the Southeast Asian nation, especially when there are so many other appealing choices nearby.

"Do I have a hard time selling Vietnam? Yes. The notion of Vietnam is still that of war, and the two main reasons for that are that it is new and it is small," says Scriven, whose team runs the biggest equity fund in Vietnam. At a minuscule 0.4 percent of the economy, Vietnam's stock market has virtually no impact on greater society -- not a good sign for a country that's looking to reform and enter the World Trade Organization by 2005.

Scriven thinks that one of Vietnam's biggest problems is the lack of institutional development. As in China, Vietnam is struggling to develop the basic requirements for a successful market such as transparency and the rule of law. "They have to build the social institutions that support a market economy," he said.

Without the institutional framework, it's hard for investors to determine whether companies are good candidates for investment. "The institutional framework isn't there for a Goldman [Sachs] to buy a chunk," said Scriven. Currently, the Vietnamese government doesn't allow foreign investors to take more than a 30 percent stake in a company.

Another deterrent is the lack of good companies -- a result of a government slowdown in selling property stakes. It fears that it may give away the farm, but that also prevents the necessary reform of state-owned enterprises through infusions of private capital. In a recent report, ratings agency Standard & Poor's said that privatization -- or equitization, as the Vietnamese like to call it -- has almost ground to a halt. In March, the country's deputy prime minister reportedly said that Vietnam would not follow the model of "massive privatization" as that could cause major "social upheavals and instability."

The Vietnamese government also makes it hard for companies that want to list stocks. Instead, companies that seek capital and investors looking for large, liquid stocks meet at the over-the-counter market, whose capitalization is several times larger than the bourse at $1 billion and which boasts some 1,000 companies to choose from. The Vietnam Stock Exchange, in comparison, has 21 companies and is capitalized at just $130 million. "Companies want to list, but they are held up by overlapping jurisdictions and other policy obligations," Scriven said.

The Dragon Capital director is a big believer in the OTC market, helping to ensure that his $80 million fund stayed afloat at the same time the Vietnam stock market capsized, with a 25 percent loss, last year. Going forward, his fund is bullish on the country's banks, such as Asia Commercial Bank and Saigon Commercial Bank, because of their large size, need for capital and healthy margins. The fund's biggest investments are those exposed to the greater economy -- port operator Gemadept, telecom firm Sacom and white-goods maker Re.

The fund manager thinks Vietnam is the next great growth story -- if only people can get over the war. "You can say there is historical overhang, but half of the population is under 25. It's not in the forefront of people's minds."

But for people like Haing, a young Vietnamese who grew up in the aftermath of the war and who now works as a tour guide taking travelers through her fishing village of Ving Long, along the Mekong Delta, the conflict may be over, but it's not forgotten. "We all lost family in that war," she said.

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